To become a successful trader, it's crucial to follow a systematic approach that incorporates various key elements into your trading strategy. This article will break down these essential components and guide you in creating a coherent and profitable trading system.
Vehicle Selection:
Selecting the right trading instruments is the first step in your trading system. Consider factors like momentum, volatility, and market conditions when choosing what to trade. You can use attributes such as market cap, trading volume, price, and sector to filter and identify profitable opportunities dynamically.
Remember, the selection of vehicles plays a pivotal role in your overall trading success. The choice of instruments should align with your trading timeframe and strategy, whether you're a day trader, swing trader, trend follower, or value investor.
For example, if you decide to trade options, and you haven’t learned about options greeks or theta decay yet, this is going to be a very challenging journey for you. Our community is focused on options and futures - We did a breakdown of those two instruments in this write-up.
Entry Selection:
Once you've identified the right vehicle, it's essential to time your entry correctly. You have several entry options, such as breakout, pullback, scaled, or timed entries. The goal is to enter at the start of a potentially profitable move, which suits your trading style and risk tolerance.
Breakout-based entries involve buying when an asset breaks out of a predefined range, while pullbacks focus on entering during retracements within a trend. Choose an entry method that complements your chosen vehicle and aligns with your trading goals.
if you are a new or developing trader, its wise to learn the “easy money” setups before anything else. Some traders are objectively easier than others, and you want to build your foundation with those easier setups to master. Walk before you run. For our favorite easy money setup, check out the Two Hour Trader.
Exit Selection:
Exiting a trade at the right time is equally important as your entry. Your exit strategy should include considerations for protecting your capital in case of entry signal failure and achieving your profit objectives. The timing of your exit will vary based on your trading style, whether you're a day trader, swing trader, or trend follower.
Professional traders often exit positions while the market is strong with a scaling out method, while novice traders tend to exit during weakness, often missing out on potential gains. Adjust your exit strategy to suit your risk tolerance and trading timeframe.
Stops:
Stops are essential tools for managing risk. They can be used for entry, exit, and risk management. Entry based on stops allows you to enter a position at predetermined levels, and exit based on stops can help you exit at certain profit or loss levels. Stops are crucial for controlling risk and preventing catastrophic losses. Never “hold and hope” on a position. Have a predetermined stop loss prior to every entry you take in the market.
Risk Selection:
Your risk strategy determines how much capital you'll risk per position, the total number of positions, and under what conditions you'll increase or decrease risk. This is also known as capital allocation. A well-thought-out risk management strategy can significantly impact your overall returns and help you avoid major losses.
By adjusting your risk strategy, you can maximize profits while minimizing potential drawdowns. Be aware that traders who risk larger amounts can achieve significantly higher returns, but this comes with increased risk.
In conclusion, trading success lies in the effective combination of vehicle selection, entry and exit strategies, stops, and risk management. These elements should be viewed as interconnected pieces of a puzzle, with each one contributing to the overall profitability of your trading system.
Remember that developing a profitable trading system is an iterative process. Testing, backtesting, and real-time trading and then documenting your findings in a trading playbook will help you refine and fine-tune each element over time. While you may initially base your trading method on others' ideas, continuous experience and experimentation will lead you to develop your unique trading style.